"Constructive receipt"

Under the constructive receipt doctrine, income that is not received may be taxed as if it had actually been available to the recipient. Thus, for example, money that is collaterally assigned for participants in SERPs which are funded with life insurance (or through other means) could be considered taxable income by the IRS.

When properly arranged, however, there is no "constructive receipt" of current income from premiums used to purchase life insurance in SERPs. The funds are taxed only when received as income by the participant or beneficiary at retirement.

To avoid constructive receipt of income resulting in a taxable economic benefit to the employee, the IRS must consider the plan to be an "unfunded" or "informally" funded arrangement. That is:

• Benefits must be based on the corporation's unsecured pledge.
• Any money accumulated to meet promised benefits must remain a general asset of the business, available to the claims of creditors.
• The covered employee may have no claim to the reserve assets nor possess any incidents of ownership in the policy.

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